Greece plays the too big to fail card - will it work?

As the Greek Finance Minister continues his charm offensive around Europe, the question for the eurozone’s governments, financial institutions and banks is: how much do we have to concede to get out of this mess?

The Greeks have no chance of surviving in the eurozone, one can cut all their debt now - they will start to collect more debts straightaway because they do not have the necessary competitiveness

The new anti-austerity and anti-bailout government is pushing to reduce Athens’ huge debt burden using the argument that the country is too big to fail and if it goes down it will cause massive damage to the eurozone.

Greece owes 321 billion euros projected for 2015. That is one 174 percent of its gross domestic product – GDP being everything the country produces in a year. It is the equivalent of nearly 30,000 euros for every person living in Greece.

Around 60 percent of this is owed to eurozone governments, particularly though the European Financial Stability Facility – an emergency rescue fund.

The International Monetary Fund holds 10 percent and the European Central Bank has six percent. Private Greek banks have another three percent.

Compromise?

Creditors such as the European Union, the IMF and the ECB could give Greece even more time to pay, but Germany – the most powerful financial force in the eurozone – feels it has had enough leeway and want to see deeper economic reforms brought in faster.

Independent economist Vagelis Agapitos, believes common sense will prevail as the two sides need one another: “I think Greece has limited options because of the pressing need of the liquidity of the Greek banking system and of the Greek economy. At the same time, I think Germany wants to find a solution, and I think it will be a tough negotiation but some mid-way ground will be found, whereby Greece provides a balanced budget, provides the security of repaying most of its debt, while at the same time committing to additional reform.”

Investors obviously expect the two sides to reach an accommodation involving more time to repay debts and perhaps reduced interest rates for some loans.

That was evidenced by share prices shooting up on the Athens stock exchange on Tuesday. By end of trading the main equity index had risen 11 percent.

‘Greece can’t face the heat’

Not everyone agrees compromise is the best option. Robert Halver, Head of Market Research at Germany’s Baader Bank said: “Here on the markets everybody knows that Greece cannot face the heat of the eurozone. That is why everyone here is surprised that politicians are ready to make false compromises again and to transfer the debt problems into the future while knowing that it will not get better then.

“The Greeks have no chance of surviving in the eurozone, one can cut all their debt now – they will start to collect more debts straightaway because they do not have the necessary competitiveness. What we see at the moment is the Greek finance minister’s attempt to find allies for his debt-cut strategy. But if one lets that happen it would be the moral end of the eurozone.”

Halver argues that there are reasons why it would be better to let Greece leave the euro currency bloc now : “It has to be considered whether it makes sense to keep Greece in the eurozone come hell or high water. Are the Greeks competitive enough to stay in the eurozone knowing that production costs in, for example, Poland, are half of those in Greece? You are not doing the Greeks a favour by keeping them in the eurozone. The problems, especially social problems, are ever increasing.

“I am not saying this because I have a problem with Greece, quite the opposite, the population deserves a chance. The eurozone’s regulations are much too tight for the Greeks, they strangle them.”